Continuing to think about this - I've got a tax bill due in the next month and it has me thinking about whether I'm better off paying the bill or using the tax money (and then some) for something like this to raise the tax cash.
Doing some math gymnastics in my head, and including taxes on gains, I get a first order approximation that this would be a good idea for me. I'll be doing detailed math soon / this evening and see what it looks like. The fundamental problem with that tax bill is that it is large enough to represent a capital impairment - it'll make a dent in the resources I have for earning an income, so using that cash (plus some extra) that can pay the taxes is looking better than bad. I'll post later when I have details looking for mistakes and missing stuff.
has anyone else thought of intentionally opening an ITM BPS?
for ex, STO 12/16 BPS x100 -p1200/+p1100 credit $675,000
assuming that war is over and "everyone" knows sp will be >1200 in Dec, is there any other risk? i know that:
- weeklies will give more $ income overall (but it's so stressful)
- theta collection is slow until yearend is approaching
- i can always BTC anytime when profit is already good (ie 50%)
- i can use the $675k to sell 30% OTM 5 DTE trades while waiting for 12/16
what am i missing or haven't thought of? TIA!
After lots more thinking about this I think that this makes a lot of sense for me at least.
First some info. Looking at different ITM BPS I found that the credit % can be dialed up or down depending on how far OTM or ITM you want to go. The 1200/1100 Yoona uses is 68%. Turn that into 1200/1150s about it'll be around 69%.
The 1250/1150 I settled on is 70%.
The 1400/1350 is very close to 80% ($800k on $1M)
And to really go crazy, the 2400/2300 is 97%. You do this trade because you want the cash, and (low %) optionality on upwards of a 970k gain is nice. If you expect 2400+ then you'll probably be a lot better off buying some calls, but you also don't start by adding nearly $1M.
NOT-ADVICE (really, really, for real)
Assuming the $1M
@Yoona is using, and that I have $400k as a lump due (taxes - could be down payment, new Roadster, whatever). The question I've been pondering, am I better off just paying the taxes (as I've been assuming) and continue on with the remaining $600k?
Or do I sell an ITM BPS using the $1M, and then use the credits to pay the taxes and invest the remainder?
The short answer, for me, is that I'm better off with the ITM BPS. To be specific the 1250/1150 Jan '23 gets me the right mix of stuff. Assuming I can get the midpoint of the bid/ask then I receive a 70% credit or $700k.
Worth noting that the % credit can be dialed up and down as desired.
Skipping over the math, I have 4 scenarios to compare.
Scenario 1 - simple, baseline. $
675k come Jan '23. Pays the current lump due, as well as $75k on a $150k gain (50% marginal rate - your mileage will vary)
Scenario 2 - 70% BPS, nearly full loss (open at 700k, close for 900k, losing 200k).
475k at the close with a 125k tax loss.
Scenario 3 - as #2, but with an early close at 50% gain.
775k
Scenario 4 - as #2, but with a 6/7ths gain (86%).
1175k with all taxes on the BPS gain paid plus the 300k investable gains, assuming 50% marginal tax rate.
Using a 1250/1150 BPS. I consider the 50% gain outcome to be the most likely. That's already $100k better than just paying the taxes. The position has optionality that can take it up to 1175k (another 400k) pretty easily if the shares take off sometime in the year as I expect (decide then what to do).
If we go down, an early close for 200k instead of 100k is a 575k ending position, and an early close for 300k is a wash relative to scenario #1.
I'm assuming 25% earnings on the 300k (BPS) or 600k (simple) scenarios over the balance of the year. That's around 3%/month on the $300k. Presumably I'll be selling BPS or CSP / margin backed puts. It -is- a margined /taxable account. I could also ignore this bit - 25% on 300k, 50% marginal tax rate is around $40k in scenarios 2/3/4.
The math behind the scenes includes the following (not working it all out here though).
Start with $1M
Add $700k from the BPS
Pay the $400k due now
Use the remaining $300k for investing ($1M is reserved to back the BPS and is ignored - assume it is fully reserved).
Close the position for nearly full loss, 50% gain, nearly full gain). More particularly, open the position for $70. This different scenarios translate to a close at $90; $35; or $10.
Also add up the gains or losses and pay 50% marginal tax rate on that as an additional change to the cash. Taxes aren't necessarily this simple but a lower marginal rate mostly makes for a better result for me.
Then add up the changes in cash to the bolded numbers above in scenarios 1-4.
Question in this section - is there something I'm missing in my tally of plues and minuses? I'm assuming commissions and fees are $0 and of course that isn't true. Other stuff?
Another scenario to test is to use $600k for an ITM BPS instead of $1M. The $600k is chosen to generate a credit that is just right for paying the $400k due now, with the optionality to get all of that back in January when the BPS finishes OTM. The math will be a bit more interesting.
Scenario 5 - Use $600k for BPS instead of $1M. The remaining $400k (from $1M) has a more conservative use and is ignored (CSP has been my recent use). The simple approach leaves $200k after paying the $400k. The full loss shrinks the money (down to $80k), but the 50% early close leaves me with a 50% gain (300k vs 200k) and the nearly full gain BPS gain is about 90% gain (380k vs 200k) relative to the simple approach..
-- The shorthand for describing this is to use the cash that would have been used to pay the lump (plus some for comparison) and nothing extra. This smaller position emphasizes the early 50% close and gets a great start on buying back the $400k lump that is being paid out now.